There are multiple niches in the microcap space where GeoInvesting’s track record has proven that consistent alpha can be achieved. Each strategy provides favorable percentage returns, but is limited in size. A combination of well-defined strategies can enhance portfolio returns by offering the benefit of diversifying into uncrowded situations with low market correlation without overexposing to a single stock.
We believe the best way for a company of your size to approach a microcap strategy would be to deploy a target capital amount across a few basket portfolios of around 5 stocks each. These baskets can vary by strategy and time horizon. Around these baskets, we can implement one-off ideas as they emerge based on very high probability special situations
Regression analysis: Simple Linear Regression Multiple Linear Regression
GeoInvesting Process - Long Biased Srategies
1. Confidential – Not for Distribution 1
GeoInvesting’s Proven Long Strategies for Microcaps
GeoInvesting’s long portfolio concentrates on small capitalization stocks, mainly microcaps. We believe the main
reasons why microcaps offer opportunities to produce alpha are:
More Opportunities; There are over 10,000 microcap stocks traded in North America. Among those are
many overlooked opportunities that have yet to be discovered by the broader investment community.
Market Inefficiencies that are the result of a large amount of companies and few organized institutions that
track these stocks systematically. Many microcap stocks don’t have any analyst coverage and most have
minimal communication with the investor public.
Small Firm Effect; The small firm effect has been an accepted anomaly in financial academia since
the late 80s and it still persists to this day. Notably, academics and respected practitioners like AQR
have published papers that refute the notion that the outperformance in microcaps is attributable
to illiquidity, rather that real unexplainable outperformance exists.
Information Arbitrage; With a relatively inefficient market and less sophisticated participants,
there are, at times, opportunities to gain a real information edge by identifying and analyzing
critical new information better than other market participants. We call acting on differential
insights that are not yet fully digested by the market information arbitrage.
Little Institutional Ownership; There are few institutions invested in microcap stocks, mostly because of
restrictions that have no impactful fundamental reasoning.
Low Correlation; Microcaps are statistically proven to have a lower correlation to the broad market
indices than any other market cap segment, partly because they have different shareholder bases
than large cap stocks, and partly because of the nature with which microcaps trade.
Incremental Buyers; We try to find microcap stocks that will not stay under the radar for long.
Successful microcaps experience the positive feedback loop of increasing liquidity, which attracts
institutional buyers, which in turn brings more liquidity and attracts even more buyers. By the
time big institutions buy into a microcap, we are usually the selling shareholders.
Growth Potential; Microcaps are often smaller revenue base companies which are often more
entrepreneurial and flexible to take advantage of arising opportunities. Companies that start from a low
revenue base/market cap can experience more dramatic growth, and the run way is often longer. We also
like to focus on “Big Cap Micros”, which are microcap companies that we believe are nearing “Big Cap” type
revenue.
Access to Management; Management teams in the microcap space tend to be more accessible and open
to conversation than their big cap counterparts. GeoInvesting’s Co-Founder Maj Soueidan has established
relationships with hundreds of management teams over his 28 year investment career.
There are multiple niches in the microcap space where GeoInvesting’s track record has proven that consistent alpha
can be achieved. Each strategy provides favorable percentage returns, but is limited in size. A combination of well-
defined strategies can enhance portfolio returns by offering the benefit of diversifying into uncrowded situations
with low market correlation without overexposing to a single stock.
We believe the best way for a company of your size to approach a microcap strategy would be to deploy a target
capital amount across a few basket portfolios of around 5 stocks each. These baskets can vary by strategy and time
horizon. Around these baskets, we can implement one-off ideas as they emerge based on very high probability
special situations.
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Microcap Strategies
GeoInvesting organizes ideas into different portfolios.
We populate these portfolios from strategies that fall into either the “fundamental” or “special situation” category.
The core of our strategies is based on fundamentals.
As opposed to other microcap investors, we put a lot of emphasis on profitability (or nearing profitability), and avoid
companies with bad capital structures and a near term need to raise capital under adverse conditions. We do not
exclude any industries by principal, but rather we believe there are areas where we have no differential edge, which
we avoid. Some examples of these scenarios include pre-revenue biotech, exploration stage energy companies, and
most commodity price-dependent businesses. Our investments are generally concentrated in the US.
Special situations are ideas based more event driven catalysts. These are usually short term in nature and are
opportunities that tend to arise on short notice. Frequently, we find investment opportunities that are appealing
on a fundamental level through our special situations research, so we use special situations research to not only
find great one-off opportunities, but also to feed ideas into our fundamental ideas funnel.
Portfolios
Buy on
Pullback
Run to One
Takeover
Candidate
Tier 1 OTC Multibagger
Strategies
Fundamental
GARP Contrarian
Special
Situations
M&A Turnaround
Non-Dilutive
Offerings
Activism
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Model Portfolios
We run model portfolios that each follow a distinct theme and will generally include stocks from our core strategies.
The investment time horizon is usually between 3 to 12 months, but might be shorter or longer dependent on the
situation. The performance of our model portfolios has been outstanding, especially our “Buy on Pullback”
portfolios. We can design model portfolios a la carte.
We are constantly on the hunt for stocks that react negatively, or have muted reactions, to good news. These types
of overreactions or under reactions are often the result of market gyrations or the inability of investors to digest the
scope of a particular event. “Buy on Pullback” model portfolios are designed to take advantage of these mispricing
scenarios.
Portfolio Initiated Closed # of Stocks Peak Return
Buy on Pullback #1 Jan-16 Jun-16 4 36.15%
Buy on Pullback #2 Jun-16 Oct-16 5 30.33%
Buy on Pullback #3 Oct-16 Ongoing 5 36.47%
Buy on Pullback #4 Mar-17 Ongoing 4 66.48%
Buy on Pullback #5 Jun-17 Ongoing 5 23.52%
Buy on Pullback #6 Sep-17 Ongoing 5 10.96%
Run-to-One Open Sep-13 Ongoing 13 279.64%
Run-to-One Close Jan-13 May-16 5 576.54%
Multi-Bagger May-17 Ongoing 7 39.17%
Suitable
for
funds of
all size
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Case Studies
Growth at a Reasonable Price (GARP)
The bread and butter of Geo’s long strategy has three pillars:
(1) Buying growing companies at a reasonable price (GARP), which are
(2) Nearing an inflection point
(3) Relying on a differential insight that is not fully digested by the market
We call acting on this insight information arbitrage.
Our favorite inflection points that we look and screen for are:
Reduced leverage
Margin expansion
Finding new revenue for a mature legacy product
Acquisitions
Reduced customer concentration
New management
Case Study: NV5 Global Inc.
Finding a growing profitable company led by great management early
Ticker NASDAQ: NVEE Price at Initiation $ 13.00 Time Horizon 5 Months
Price Exit $ 21.38 Return 64.46%
With NV5 Holdings, we found a management team that had rapidly built the company from a start-up in
2009 to a growing, highly profitable, and formidable firm that provided professional and technical
engineering, as well as consulting solutions, to public and private sector clients in the infrastructure, energy,
construction, real estate and environmental markets.
We believed that cash from a warrant redemption would be put to good use as management continued to
pursue accretive acquisitions while mitigating risk through customer diversification.
Our price target of around $21.00 did not take into account future acquisitions that we believed NVEE would
complete.
Key to our insights was commentary in a nearly unattended conference call. After that, we reached out to
management, built a relationship with CEO Wright Dickerson, and even interviewed him on a public radio
channel targeted at investors.
After having had one successful run with this infrastructure company, we locked in an over 60% gain
between Dec. 15 2014 and May 19, 2015 on our initial investment.
Consequentially the stock continued to perform as we expected, building on a proven growth concept that
we believe still has runway. We follow the company closely, maintain our relationship with management,
and trade in this stock profitably to this day.
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Case Study: GTT Communications
Information Arbitrage around management changes and an operational inflection point
Ticker NYSE: GTT Price at Initiation $ 4.25 Time Horizon 14 Months
Price Exit $ 12.98 Return 205.41%
GTT Communications, Inc.
provides cloud networking
services to multinational
enterprises, carriers, and
government customers
worldwide.
We covered GTT because we
did not think investors
understood how much value
that a new management team
and a pending acquisition
would bring to the company.
We also believed that investors
needed to look past the losses
the company was reporting at the time, since GTT’s business model centered on high recurring revenues,
“sticky” customer relationships, and filling a void across domestic and global cloud networks.
Our analysis concluded with a price target of $13.50, which the stock achieved within 7 months after Geo
publishing research
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Turnaround | Restructure
Our favorite turnaround opportunities in the microcap space often involve companies with a substantial revenue
base that have lost the faith of their institutional shareholder base through continuous losses and the perpetual
need for capital injections. We know that sometimes these businesses can be viable and profitable on a smaller
scale. Looking for inflection points in a turnaround has proven to be a profitable strategy time and again, as
exemplified by our research on ZYXI and many others. Some useful indicators that hint at a successful turnaround
are insider buying and the engagement of a new leadership team. A change in the business model can sometimes
cause a company to turn its stock price around, as seen in software companies that successfully transition from
lumpy licensing revenues to a cloud based model with smoother more recurring sales.
Case Study: Zynex, Inc.
Successful turnaround taking hold, stock gains momentum after settling credit situation
Ticker OTC:ZYXI Price at Initiation $ 0.40 Return 675.00%
Price Exit Still Holding, Current Price $ 3.10
Zynex, Inc is a medical technology
company specializing in the
manufacture and sale of non-
invasive medical devices for pain
management, stroke
rehabilitation, cardiac monitoring
and neurological
diagnostics. The company’s
product are fully developed, FDA
cleared, and commercially sold
for years.
We found the company in early
June 2017. Strong earnings
momentum, cost cutting
initiatives that were ahead of
schedule, and improved collection efficiency intrigued us. Our EPS estimate for 2017 implied substantial
upside. We understood the company had problems with working capital management and creditors and
that this was a turnaround in the making.
In mid-July, Zynex announced a resolution of its credit situation, along with increased expectations for the
2017 and beyond.
The stock is currently trading at roughly 5.5 times the price where found it.
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M&A
Mergers in the small and microcap space happen frequently, but often in waves and in particular industries that are
in consolidation. The key is to identify the shift in M&A activity and locate attractive targets early. Over 40 companies
we owned were acquired following our bullish coverage. GeoInvesting was, for example, able to position early during
the consolidation of SaaS companies between 2014 and 2016, and we identified companies such VOCS, MKTG,
TNGO, and EOPN that were consequentially acquired at attractive premiums.
Case Study: Vocus Inc
Positive commentary and initiation of guidance, company meets criteria for SaaS buyout target
Ticker NASDAQ: VOCS Price at Initiation $ 10.67 Time Horizon 11 Months
Price Exit $ 18.00 Return 68.70%
Vocus Inc was a cloud based marketing automation service providers.
We noticed the company after we discovered positive commentary in its quarterly earnings call. VOCS
started issuing guidance for the first time.
A rights offering with heavy insider participation gave us a hint that a transaction could be on the horizon.
The company met all our standards for a tier 1 SaaS acquisition target.
Less than 12 months after we initiated our coverage, Vocus was bought out at an attractive premium.
Activism
The microcap space has recently experienced a growth in shareholder activism, with many activists moving down
the market cap totem pole in their search for alpha. Smaller companies tend to have more room for operational,
financial, and governance optimization. Successful activist plays that we’ve highlighted include operational
turnarounds or “facilitating” a corporate transaction such as the sale of GLDC.
Case Study: Golden Enterprises Inc
Activist shapes up Company for Sale
Ticker NASDAQ: GLDC Price at Initiation $ 6.00 Time Horizon 1 Month
Price Exit $ 12.00 Return 100.00%
We found snack producer Golden
Enterprises in mid-2014, but it really caught
our attention in 2016 after an activist
investor filed a 13D in late 2015, pushing
for a sale of the company.
We found indications in the conference call
transcripts that the company’s declining
revenue trend might reverse after a recent
merger.
8. Confidential – Not for Distribution 8
Additionally, a trust situation with a departed major stockholder helped reiterate our opinion that the
company should/would explore a sale.
Only 4 months after our initial research, and 1 month after the publication of our research report, the
company was acquired at $12.00 per share.
Case Study: Blue Bird Corp
Former SPAC with bogus take-over bid. Geo interviewed by Barron’s, where we publicly opposed the transaction and called for $18 + per
share in value.
Ticker NASDAQ: BLBD Price at Initiation $ 13.98 Time Horizon 9 Months
Price Exit $ 18.12 Return 29.61%
Ticker NASDAQ: BLBDW Price at Initiation $ 1.25 Return ~335.2%
Price Exit Closed majority of position at ~5.44
Blue Bird is a school bus
manufacturer that was founded in
the 1930s. The company has been
listed on the NASDAQ as Blue Bird
Corporation (NASDAQ:BLBD) since
2015 when PE firm Cerberus
Capital took them public while
retaining a majority stake.
Geo began following Blue Bird in
early 2016 after Cerberus sold its
57% stake to another private
equity company, American
Securities. The PE fund buying the BLBD shares had just been raised, was oversubscribed by almost $1b,
and previous American Securities funds had preferred to take investments private in order to have total
control.
In July, American Securities submitted a take-over offer at $13 per share. Our legal analysis of minority
shareholder rights under Delaware law concluded that the offer would not close without approval of an
independent committee and approval by the majority of minority shareholders. On July 27, 2016, we
published a research report as to why we did not think the company’s recently received takeover offer
would close. We were right, and on September 8 we re-iterated our analysis along with a legal analysis of
minority shareholder rights under Delaware law. In August, our analysis was featured in Barron’s.
Our fundamental analysis identified the dramatic reduction in school bus manufacturers over the last
decade as a positive industry trend with the remaining players soon to extract more profits, similar to the
aviation industry. Blue Bird was well positioned to take advantage of an improving industry environment.
As the takeover fell apart, BLBD shares fell further, making for an even more attractive entry point. In
January of 2017, Blue Bird announced it would develop a Zero Emission Vehicle supported by a $4.4mm
9. Confidential – Not for Distribution 9
grant from the US Department of Energy with other entities assisting, for a total of $9mm+ of funds. Later,
Geo closed out its long position in the stock but remained long the warrants.
Non-Dilutive Offerings
Small and microcap stocks sometimes have big legacy stockholders, often times PE funds that near their exit time
who wish to sell their stake through an underwriter in a non-dilutive secondary where no new shares are issued. The
seller often has a low cost-basis, the offering is generally big relative to the shares outstanding, and the emphasis is
on getting a deal done and making a clean exit. In other instances, microcaps that sell stock in secondaries to raise
growth capital will often fall hard. We cull out the companies that we think will see earnings accretion from new
capital or if proceeds are used to pay down debt, resulting in a cleaner balance sheet.
We observe big discounts in these offerings, but the stock will generally recover quickly after the overhang is gone
and the uncertainty about the big seller is removed or selling pressure abates, as recently observed in BXC. BGSF and
ORBK are additional examples of accretive secondary offerings that were misunderstood by the market, where Geo
was able to take advantage of the situation. There is extra liquidity created around these events, which allows
participants to trade in and out of these situations with bigger investment amounts.
Case Study: Orbotech Ltd
Sizable secondary offering leads to weakness in stock, but is in reality accretive to earnings
Ticker NASDAQ: ORBK Offering Price $ 26.52 Time Horizon 1 Month
Offering Volume 3,850,000 Price Exit $ 28.82 Return 8.67%
Orbotech is principally engaged in
the design, development,
manufacture, marketing and service
of yield-enhancing and production
solutions for specialized
applications in the supply chain of
the electronics industry.
We initially found the company in
2015 after it increased its annual
guidance. Our analysis indicated
that the company might finally turn
profitable and we kept following the
stock.
In June 2016, the company announced a sizable secondary offering of 3.85m new shares. The stock trended
down quickly and ended up trading below the offering price.
Our analysis showed that the company’s plan to deleverage the balance sheet would be immediately
accretive to earnings and we had a strong EPS outlook for the company. We initiated a position on weakness
in the stock around the time of the offering. We continue to trade profitably in the stock to this day.
10. Confidential – Not for Distribution 10
Case Study: BlueLinx Holdings Inc
Major Legacy Shareholder sells Stake through Underwriter at Big Discount, Making for Attractive Entry Point
Ticker NASDAQ: BXC Offering Price $ 7.00 Time Horizon 24 months+
Offering Volume 3,863,850 Current Price $ 27.25 Return 289.2%
BlueLinx Holdings is a leading distributor of building and industrial products in the US.
We started tracking the company in late 2016, an asset sale put them ahead of schedule in their
restructuring efforts.
Overhang in the stock suppressed the stock price, private equity company Cerberus Capital was still a
majority holder of the company and was anticipated to look for an exit soon.
In September 2017, we observed weakness in the stock, and anticipated that Cerberus would soon try to
sell its stake. Cerberus’ fund that was invested in BXC is winding down.
The shares were sold in a non-dilutive secondary offering through an underwriter, BTIG LLC, who offered
GeoInvesting to participate in the offering at $7.00 per share. No new shares were issued, Cerberus just
opted to sell its stake through an underwriter.
BXC ran to over $10 in the beginning of 2018 after paying off some of its debt obligations and making a
large acquisition
Positive earnings reports as a result of the acquisition in early 2018 propelled shares to over $40 at one
point, a nearly 500% gain on our original investment
Shares have settled today around $27 and we are still long